Bank of Nova Scotia Vs Assistant Director of Income Tax (ITAT Mumbai)
ITAT Mumbai held that disallowance made u/s. 14A of the Income Tax Act read with rule 8D deleted as tax free funds were more than investment made on which exempt income was earned.
Facts- During the course of assessment, AO noticed that assessee has earned interest income of Rs.2,77,57,534/- from 1997- 1998 series of NABARD Bonds which has been claimed as exempt from income tax u/s 10(15) (iv) (h) of the Act. After referring the tax free funds the assessee submitted that no disallowance u/s 14A should have been However, the AO has not agreed with the submission of the assessee and disallowed an amount of Rs.9,56,892/- u/s 14A r.w.Rule 8D towards expenditure incurred for earning the exempt income.
The assessee filed the appeal before the ld. CIT(A). however, the CIT(A) further made enhancement to the disallowance by Rs.3,2 1,184/- and sustained the total amount of disallowance of Rs. 12,78,076/- as an expenditure incurred towards earning the exempt income. Being aggrieved, the present appeal is filed.
Conclusion- Hon’ble Apex Court in the case of South Indian Bank Ltd. vs. CIT has reiterated the legal position, “that the proportionate disallowance of interest is not warranted u/s.14A of the Income Tax Act for investment made in tax free bonds/ securities which yielded tax free dividend and interest to assessee bank in those situation where, the interest free own funds available with the assessee, exceeded their investment.”.
Held that it is undisputed fact that during the year under consideration also the available tax free funds were more than the investment made on which exempt income was earned therefore, we direct the assessing officer to delete the disallowance made u/s 14A r.w.Rule 8D in the case of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
All these cross appeals filed by the assessee and the revenue are pertained to assessment year 2003-04 to 2009-10 arised from the different order of CIT(A). Since, common issue on identical facts are involved in these appeals, therefore, all these appeals are adjudicated together by taking the ITA No. 5634 & 5740/Mum/201 1 as a lead case and its finding will be applied mutatis mutandis to the other appeals wherever it is applicable.
ITA No. 5740/Mum/201 1 (Assessee’s Appeal) AY: 2005 -06:
“1. In upholding, in principle, the learned AO’s action for disallowance under section 1 4A of the Act and enhancing the disallowance computed by the learned AO.
2. In disallowing the salary paid to expatriate employee of the Indian branches in respect of services rendered wholly and exclusively in connection with the Indian operations of the Appellant
3. In confirming the transfer pricing adjustment of Rs. 1,737,912 made by the learned Transfer Pricing Officer (‘the learned TPO’).
4. In upholding the taxation by the learned TPO of the mark-up in respect of provision of services rendered by the Appellant to its head office/ overseas branches in contradiction of Article 7(3) of the Double Taxation Avoidance Agreement between India and Canada.
5. In upholding the inclusion of comparable companies selected by the learned TPO in determining the arm’s length price in respect of transactions relating to the provision of correspondent banking services rendered by the Appellant to its HO! overseas branches.
6. In upholding that the margin range of 38.74% to 78.94% of the comparable companies selected by the learned TPO cannot be considered to be wide and it proves that the companies engaged in these financial spaces have generally returned better profits during the financial year
7. In upholding the use of data pertaining to the financial year 2004-05 in determining the arm’s length price, which was not available in the public domain at the time when the Appellant was required to comply with the requirements under the Act and the relevant Rules.
8. In disregarding the margin analysis undertaken by the Appellant using the financial data of the comparable companies for the financial year 2004-05 which was submitted with the learned TPO as well as during the course of the Appeal hearing.
9. In wrongly computing the benefit of 5 percent variation from the operating cost as against the revised arm’s length price for the international transaction relating to the provision of correspondent banking services under the provisions of section 92C(2) of the Act.
The Appellant craves leave to add, alter, amend or delete the above grounds, at or before hearing of the appeal.”
2. The fact in brief is that return of income declaring a total loss of 944,90,280/- was filed on 31.10.2005. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 01.08.2006. The assessee is a banking company incorporated in Canada. It had obtained a license from the RBI to carry out banking activities in India. The assessee (Bank of Nova Scotia ‘BNS’) has been operating in India through branches in Mumbai, Delhi, Bangalore, Coimbatore and Hyderabad. The assessment u/s 143(3) of the Act was finalized on 30.12.2008 and total loss was assed at Rs.218,61,193/- after making various additions and disallowances. The further fact of the case are discussed while adjudicating various grounds of appeal filed by the assessee.
Ground No.1: Disallowance of expenditure towards earning interest income exempt u/s 10(15):
3. During the course of assessment the assessing officer noticed that assessee has earned interest income of Rs.2,77,57,534/- from 1997- 1998 series of NABARD Bonds which has been claimed as exempt from income tax u/s 10(15) (iv) (h) of the Act. After referring the tax free funds the assessee submitted that no disallowance u/s 14A should have been However, the AO has not agreed with the submission of the assessee and disallowed an amount of Rs.9,56,892/- u/s 14A r.w.Rule 8D towards expenditure incurred for earning the exempt income.
4. The assessee filed the appeal before the ld. CIT(A). however, the CIT(A) further made enhancement to the disallowance by Rs.3,2 1,184/- and sustained the total amount of disallowance of Rs. 12,78,076/- as an expenditure incurred towards earning the exempt income.
5. During the course of appellate proceedings before us the ld. Counsel submitted that the issue of disallowance of expenditure towards earning exempt income is fully covered in favour of the assessee as per the various decision of the ITAT, Mumbai in the case of the assessee itself as under:
“1. ITAT Order in the Appellants own case for AY 2004-05 [ITA No 3530/MUM/2009 (Mum)]
2. ITAT Order in the Appellants own case for AY 2002 -03 [ITA No 681 8/MUM/2006(Mum)]
3. ITAT Order in the Appellants own Case for AY 1998-99 [ITA 5351/M/2001 (Mum.)]”
6. Heard both the sides and perused the material on record. We have considered the decisions of the ITAT in the case of the assessee as referred by the ld. Counsel. With the assistance of ld. Representative we have perused the decision of ITAT Mumbai for A.Y. 2004-05 vide ITA No. 3530/Mum/2009. The relevant operating part of the decision is reproduced as under:
“5. We have heard the submissions made by rival sides and have examined the orders of authorities below. The ground No.1 and 2 of appeal by the assessee are against disallowance made u/s 14A of the Act. We find that the manner and reasons for disallowance u/s. 14A of the Act in the impugned assessment year is similar to the one in Assessment Year 2002-03. The Co- ordinate Bench deleted the disallowance by observing as under:
“6.2 We have heard the submissions made by rival sides and have examined the orders of authorities below. The CIT(A) in the impugned order has given finding of fact that the assessee has surplus interest free funds in the form of capital and reserves to cover the investment made. Purportedly, no fresh investments were made in the impugned assessment year. The assessee had made investments in NABARD tax free bonds in assessment year 1996-97 and 1997-98. Similar disallowance u/s. 14A of the Act was made by the Assessing Officer in assessment year 1998-99 for earning tax free interest income. The Coordinate Bench vide order dated 24/03/2006 (supra) deleted the disallowance. The Hon’ble Apex Court in the case of South Indian Bank Ltd. vs. CIT (supra) has reiterated the legal position, “that the proportionate disallowance of interest is not warranted u/s.14A of the Income Tax Act for investment made in tax free bonds/ securities which yielded tax free dividend and interest to assessee bank in those situation where, the interest free own funds available with the assessee, exceeded their investment.”. The Revenue has not disputed the fund position as highlighted by the CIT(A) in the impugned order. Thus, taking into consideration entire facts of the case and the law expounded by Hon’ble Apex Court in this regard, we find no merit in ground No 1 of the appeal, hence, the same is dismissed.”
Since it is undisputed fact that during the year under consideration also the available tax free funds were more than the investment made on which exempt income was earned therefore, following the decision of ITAT on the similar fact and identical issue as discussed supra we direct the assessing officer to delete the disallowance made u/s 14A r.w.Rule 8D in the case of the assessee. Accordingly, this ground of appeal of the assessee is allowed.
Ground No. 3 to 8: Transfer Pricing adjustment in respect of Correspondent banking services and Correspondent Banking Charges – whether to be excluded in view of Article 7(3) of the India- Canada DTAA and Upholding the inclusion of comparable selected by the TPO in respect of correspondent banking services and Upholding the use of single year data in determining arm’s length price in respect of Correspondent banking services:
7. All these grounds are not pressed therefore the same stand
Ground No. 2: Expatriate Salary:
8. During the course of assessment the assessing officer noticed that assesse has claimed deduction for salary paid to expatriate employees to the amount of Rs. 106,08,973/-. However, the assessing officer was of the view that the aforesaid expenses had been incurred as overseas salaries of the expatriate was in the nature of head office expenditure, therefore, same was disallowed u/s 44C of the Act.
9. The assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) held that expenditure so claimed on the salary of expatriate employees is found to be deductible and allowable only to the extent of the evidence produced in respect of presence of Shri Denis Vaz till 30.10.2014.
Therefore, 7/12 of the salary pertaining to M/s Danis Vaz which comes to Rs.35,25,270/- was allowed and the remaining amount of Rs.70,83,703/- was disallowed.
10. During the course of appellate proceedings before us the ld. Counsel submitted that two employees Mr. Danis Vaz and Mr. Tery Watkins were the Canadian nationals who were on secondment to Indian operations of BNS and during the year under consideration relevant to assessment year 2005-06 have continually rendered services exclusively for the assessee company. The ld. Counsel further submitted that in the case of both the employees their global income were offered to tax in India, therefore, disallowance of claim of deduction of the salary paid to these employees is not justified. The ld. Counsel has also filed details of salary paid to these employees from A.Y. 2002-03 to A.Y. 2005-06.
On the other hand, the ld. D.R supported the order of lower authorities.
11. Heard both the sides and perused the material on record. The assessee has claimed deduction of salary paid to the expatriate employees as under:
